CYIENTNSEQ2 FY24October 19, 2023

Cyient Limited

7,070words

54turns

9analyst exchanges

3executives

Download PDF ↗CYIENT stock page →

Management on call

Krishna Bodanapu

EXECUTIVE VICE CHAIRMAN & MANAGING DIRECTOR, CYIENT LIMITED

Karthik Natarajan

CHIEF EXECUTIVE OFFICER & EXECUTIVE DIRECTOR, CYIENT LIMITED

Prabhakar Atla

PRESIDENT & CHIEF FINANCIAL OFFICER, CYIENT LIMITED

Key numbers — 40 extracted

rs,

ears of experience. He has developed, launched and operated new business verticals in semiconductors, chemicals, energy and clean energy across geographies. As you know, sustainability and the associa

27.5%

call, I just want to highlight that in the last quarter we have seen the aerospace business grow 27.5% year-on-year. As many of you know and as many of you have followed us for a long time, aerospace

11%

he communications industry is going through a bit of a lull. In our case also, there was about an 11% degrowth in communications for the quarter under discussion. But we're quite confident that this

45%

hat we're having a pleasant day at Hyderabad; temperature is moderate 27 deg.C, humidity is about 45%, wind speed is at 10 kilometers per hour and visibility is a clear 25 kilometers. All of these I

178.4 million

namic macroeconomic scenarios. In terms of revenue, Q2FY24 U.S. dollar revenue for DET stood at 178.4 million, a growth of 1% quarter-on-quarter in constant currency and 17.1% year-on-year in constant curren

os. In terms of revenue, Q2FY24 U.S. dollar revenue for DET stood at 178.4 million, a growth of 1% quarter-on-quarter in constant currency and 17.1% year-on-year in constant currency. In rupee ter

17.1%

evenue for DET stood at 178.4 million, a growth of 1% quarter-on-quarter in constant currency and 17.1% year-on-year in constant currency. In rupee terms, the revenue stood at Rs.1,476 crores with the

Rs.1,476 crore

nstant currency and 17.1% year-on-year in constant currency. In rupee terms, the revenue stood at Rs.1,476 crores with the growth of 1.5% quarter-on-quarter and 22.3% year-on-year. We have two key growth driver

1.5%

ear in constant currency. In rupee terms, the revenue stood at Rs.1,476 crores with the growth of 1.5% quarter-on-quarter and 22.3% year-on-year. We have two key growth drivers behind this performance

22.3%

rupee terms, the revenue stood at Rs.1,476 crores with the growth of 1.5% quarter-on-quarter and 22.3% year-on-year. We have two key growth drivers behind this performance. Firstly, our core segments

16.5%

opic later in the call today. In terms of EBIT margin, Q2FY24 DET normalized EBIT margin stood at 16.5%, highest in the last 11-years and grew by 47 bps quarter-on-quarter and a healthy 406 bps year-on

47 bps

argin, Q2FY24 DET normalized EBIT margin stood at 16.5%, highest in the last 11-years and grew by 47 bps quarter-on-quarter and a healthy 406 bps year-on-year. I would also like to mention that this QoQ

Advertisement

Guidance — 20 items

Karthik Natarajan

opening

“While we expect the government spending around RDOF and BEAD programs to continue to drive the growth starting later this quarter or early next quarter.”

Karthik Natarajan

opening

“And also, in semiconductors where we have seen a softness over the last six months due to the macro issues, we do expect that the demand should start coming back by latter part of this year.”

Karthik Natarajan

opening

“And this is an interesting project where we are trying to build autonomous construction equipment for our customers.”

Karthik Natarajan

opening

“And we also have won a project on AI power software testing using the solution we built called CyFAST and this is for a framework that is built for automated system and software testing, and this is AI powered.”

Karthik Natarajan

opening

“On the fiscal '24 guidance, we are keeping our 15% to 20% guidance that we have given earlier with the commentary that we expect it to be around the lower end of the range and EBIT margins we have guided about 150-250 basis points improvement as compared to fiscal '23 and we are holding on to the same numbers.”

Karthik Natarajan

“Ruchi, I think we have talked about last quarter, and we said we do expect softness on the communications segment driven by the broader capex cycle that has happened over the last 2-3 years.”

Karthik Natarajan

“We are starting to see in few pockets and there was a slowdown that we did not anticipate earlier and some of those projects have been put on hold.”

Karthik Natarajan

“We do expect that they should really jump back sometime in early Q4.”

Sulabh Govila

“My second question is with respect to the guidance that we have in which we've tended to guide towards the lower end.”

Sulabh Govila

“Whether would you expect that to gradually pick up, which would mean that 4Q would be better than 3Q, just some understanding there?”

Risks & concerns — 8 flagged

As many of you know and as many of you have followed us for a long time, aerospace is a key part of our business and it is a business that has gone through a significant challenge.

— Krishna Bodanapu

We are starting to see in few pockets and there was a slowdown that we did not anticipate earlier and some of those projects have been put on hold.

— Karthik Natarajan

Of course, the first concern that we had was the safety of our employees, not that we have many, but we have a few in Israel in the DLM business, of course, our suppliers and customers.

— Krishna Bodanapu

So that was the first concern and I'm glad to say that everybody is safe, though of course everybody has an impacted family member or an impacted colleague.

— Krishna Bodanapu

I think you spoke about some slowdown in Q3 and then picked up in Q4 or do you expect growth to be more evenly spread given we are anticipating telecom recovery?

— Mohit Jain

Mining customers are having difficult period because of the pricing issue, but that is also making them to drive some cost out and that would help us for the next two, three quarters.

— Karthik Natarajan

So, have we gotten to a stable run rate in that account or are we still seeing the impact of higher offshoring in that particular account?

— Shradha

As you know, we are facing some very uncertain times in the world with some of the geopolitical issues that are going on, but I want to assure you that we've built a very robust portfolio and also we've built a very de-risked portfolio as many of you know, while we've had some challenges in aerospace previously, there were other businesses like comms that picked up and now that there are challenges in communications, aerospace is really picking up this time.

— Krishna Bodanapu

Advertisement

Q&A — 9 exchanges

I have two questions. First, what has led to the margin expansion? Second one, could you please share what you see as outlook for your Communications vertical as we move ahead?

Prabhakar Atla

Our quarter-on-quarter margin improvement has two key drivers. The first is that we have had an improvement in the operating performance. Our gross margin improved quarter-on-quarter and this is happening from improvement in utilization and also from continued rate hikes which we spoke up in the previous call. The second is we continue to have benefits from indirect cost optimization, which we have done previously. So, these two are the key drivers for the quarter- on-quarter continued margin expansion. And I hand over to Karthik to address the question on communications. Ruchi, I think we hav

So, the first question is more of a clarification from one of the remarks that you made. So, is there any sort of an impact from the geopolitical issues that we are facing in the Middle East on the sector or Cyient in anyway?

Krishna Bodanapu

Yes, absolutely. On the Cyient DET business, we do not have much business in Israel. Of course, DLM, we do have business in Israel and about 20% of our revenue and 20% of our supply chain comes from companies in Israel. So, there is a bit of dependency. Of course, the first concern that we had was the safety of our employees, not that we have many, but we have a few in Israel in the DLM business, of course, our suppliers and customers. So that was the first concern and I'm glad to say that everybody is safe, though of course everybody has an impacted family member or an impacted colleague. Hav

I have a couple of questions for Karthik. The first question is that you have seen the recent announcement of Ericsson or other comments of Ericsson wherein they expect the network spending to remain muted in calendar year '24 as well. I think we do have exposure to that market. Now, assuming that the market remains muted, do you think that the impact will filter through your communications performance or are there offsets available?

Karthik Natarajan

I'll answer this in two parts. One is, we have made an acquisition called Celfinet about 15 months ago and they do have the wireless side of the business and some part of the business which got impacted in Q2. We expect that part to recover in Q3 and Q4 as we see today. And because of some of the key spend that is required from the customers in UK and Europe, led by the platforms that Celfinet team has been able to build over the last three years and that has been definitely successful with many of the customers which helps in reducing their cost of operations. And two, they are also supported

First is on the pricing benefits that you spoke about. So, is it complete as of Q2 or we should expect some benefit in Q3, Q4 as well? And the related thing is, should we assume pricing benefits are largely narrow or is it broadly spread across verticals? And then I have a follow up.

Prabhakar Atla

There is still some more work that is left for us to do to see that we continue to receive the price benefits received so far. We will continue working on that. To your second question, not specific to aerospace only, these are broadly spread across the few segments. Second was related to Q3 furloughs. I think you spoke about some slowdown in Q3 and then picked up in Q4 or do you expect growth to be more evenly spread given we are anticipating telecom recovery? Mohit, I think we still don't have a clear view on how the furloughs would play out and given the demand situation on the aerospace si

So, what I was saying that is we don't have a clear view on the furloughs yet and the aerospace industry has robust demand and they continue to see as all of us are experiencing on a daily basis. I think most of the flights are running full and probably the capacity is still not available to meet the demand that is rising in the aerospace domain. So, that would really require some additional work that needs to be supported. So, we still hope that some of the projects will still continue to be helped during the holiday season. And we still don't have a clear view. We will kind of keep you updat

Mohit Jain

You're also anticipating some recovery in communications vertical also in Q3. Is that what you said earlier in one of the remarks? I would say we will recover by Q4 compared to H1 we will be flat on the communications vertical.

Sorry to again ask a question on the guidance. How confident are we even for the lower end of the guidance because the closest peer has downgraded growth guidance for FY24 with expectation of macro impacting the client decision-making in the last few weeks, which may impact the growth in the Q3, Q4. So, my question is, what are the assumptions in terms of rate of 3.3% compounded QoQ even grow at 15%, what are the assumptions baked in? Because in one of your statements on communications, you said that 2H for communications would be flattish versus 1H. So, are you baking in almost a flattish QoQ

Karthik Natarajan

I don't have specific number to offer on the communications for QoQ, Sandeep. But like what I said earlier, we have seen our order intake growing by 40% year-on-year. This is essentially led by the transport and the sustainability segment. Within sustainability, we see that mining and energy both are looking good. Mining customers are having difficult period because of the pricing issue, but that is also making them to drive some cost out and that would help us for the next two, three quarters. And from the energy side, some of the programs that we already won, and we are likely to win during

My first question was from a two or three-year perspective considering a lot of demand for MRO etc., What can be the revenue assumptions directionally not required to quantify, but directionally what can be expected beyond '24 or you believe this MRO requirement is just in the interim period and you could see some declining trends?

Karthik Natarajan

Nilesh, I would just say that we don't have any view for fiscal '25 yet. So, as we start building up, we'll share the details with you. But we do expect that the cycle may last few more quarters before it really flattens out and because of what I shared both on commercial as well as the defense program, and one of the large fighter aircrafts which has been put into service about seven to eight years ago is coming up for service and they will get the first engine being serviced in this quarter. They said in the next five years, they need to service about 1,000 plus engines. So, which essentiall

Hi, Karthik. On the transportation bit, in one of the large rail transportation clients, we were seeing higher offshoring which was impacting revenue for us. So, have we gotten to a stable run rate in that account or are we still seeing the impact of higher offshoring in that particular account?

Karthik Natarajan

Shradha, we don't want to respond on specific customer-related issues. I would just say broader commentary that I gave for rail is still valid and we do see some unpredictability because of the project start from their customers and that's one of the key issues that is facing the segment. And two, there are some specific customer issues and some of them getting merged and integrated, and some of them have gotten approval to get it integrated. So that's going to be part and parcel of the regular routine task. We don't expect any significant change in the near term as far as the rail business is

Thank you very much for your support, ladies and gentlemen, and taking the time out to be here this evening. As you know, we are facing some very uncertain times in the world with some of the geopolitical issues that are going on, but I want to assure you that we've built a very robust portfolio and also we've built a very de-risked portfolio as many of you know, while we've had some challenges in aerospace previously, there were other businesses like comms that picked up and now that there are challenges in communications, aerospace is really picking up this time. So, I just want to also high

Management

Speaking time

Karthik Natarajan

Moderator

Prabhakar Atla

Sulabh Govila

Krishna Bodanapu

Mohit Jain

Sandeep Shah

Nilesh Jethani

Kawaljeet Saluja

Shradha

Advertisement

Opening remarks

Krishna Bodanapu

Thank you very much and good evening, ladies and gentlemen. Welcome to Cyient Limited's Earnings Call for the Second Quarter of Financial Year 2024. I am Krishna Bodanapu – Executive Vice Chairman and Managing Director. Present with me on this call are Mr. Karthik Natarajan, CEO and Executive Director and Mr. Prabhakar Atla – President and Chief Financial Officer. Before we begin, I would like to mention that some of the statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. A detailed statement in this regard is available on our investor update, which has been e-mailed to you and also posted on our website. This call will be accompanied with the earnings call presentation, the details of which have been already shared with you. Coming to the quarter, some of the highlights: Firstly, I'm excited that Nitin Prasad has joined our board as an Independent Director, and we look forward to benefiting from his experience. Nitin is a dyn

Prabhakar Atla

Thank you, Krishna. Hello, everyone. I hope you're all doing well, and I hope you're all having a good day. The Management Team of Cyient is joining this call today from our offices in Hyderabad, India. I would like to first update you that we're having a pleasant day at Hyderabad; temperature is moderate 27 deg.C, humidity is about 45%, wind speed is at 10 kilometers per hour and visibility is a clear 25 kilometers. All of these I guess can be considered as healthy operating metrics of a pleasant day, especially in tropics. Under even perhaps what are typically termed as lead indicators for a pleasant evening ahead. With a small digression for which I seek your pardon, please allow me to present the financial results of the Cyient for Q2 of FY24. Before we start, just as a small recap from our previous earnings call, i.e., the Q1 FY24 Earnings Call, Cyient business has been reclassified since Q1 FY24 into three segments which you can see on the screen. The presentation now under discu

Karthik Natarajan

Thank you, Prabhakar. Good day, everyone. Hope all of you are having your fantastic festive season, especially in India. I'm pleased to share the details of the quarterly performance as discussed by Prabhakar and Krishna and happy to say that this is the 11th successive quarter of growth out of 13 quarters that we have been reporting for the last 13 quarters from Q1 of fiscal '21. We had two quarters of flattish revenue and 11 quarters of successive growth that we have seen, which has been a steady performance for many quarters. Having said that, I'll just pick up two of the key columns here which are essentially the constant currency numbers for four of the business segments. I think we have talked about building a balanced portfolio. I think this is really starting to play off well. And if you look at transportation, which has shown 2.7% quarter-on-quarter constant currency growth with about 22.1% constant currency growth year-on-year and as Krishna mentioned, aerospace continues to

Advertisement

← All transcripts CYIENT stock page →

Cyient Limited

Market Movers